Don’t Buy A Home When You Leave Active Duty

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Servicemembers & families don’t want to read this. I understand. Nobody wants to make an extra move, yet after your transition you might not be done moving anyway.

Even worse, you’ve been waiting a long time for this. You’ve been in the military for years (even decades) and you’re finally getting out. Nobody is going to tell you where to work, where to live, or what to do. You won’t have to move your household goods (yet again). You’re free to live where you want in your “forever home” surrounded by family, good schools, and great neighbors!

I’ve been there too. My spouse and I moved 14 times between our dual-military careers. We’ve filed thousands of dollars of household goods damage claims (and we’ve been reimbursed hundreds of dollars). We’ve had to settle our family in a new town and get our kid into a new school while our new bosses tapped their feet impatiently until we could show up at our new billets.

We understand being homeowners, tenants, and landlords. We’ve rented at eight duty stations. We bought four homes during our careers (because “Real estate always goes up! Right?”) Today we still own two homes on Oahu. (Long story. These photos show our rental property through the years.) We’ve been landlords for over 20 years and we know all about net operating income & capitalization ratios.

Let’s look at what goes into buying your first home after the military. First we’ll describe all the ways it can go wrong, and at the end of this post we’ll suggest the way to do it with less hassle. I’ve also included some advice on improving the career search.

The Myth of the Forever Home

All it needs is a unicorn!

This is particularly ubiquitous, pernicious, and vicious. We all want to believe that we won’t have to move anymore. Every military veteran and all of their families dream of finally finding their place with the perfect room for everyone (and their favorite furniture). We all want to enjoy everything in our new communities, put down real roots, and watch our grandkids(!) see the bedrooms where Mom & Dad grew up after the military.

We want this because military families move so often. Normal civilians don’t do this, right?

It turns out that civilians don’t move as much as military families, but they still move a lot.

Your chances of picking your bridge career on the first try are only 1 out of 3! Only 40% of military veterans returned to their home of record and another 38% changed their state of residence again since leaving the military. Even worse, the survey indicated that employed veterans changed jobs about every four years.

The worst part of the myth is the unrealistic expectations and self-imposed pressure that it puts on military families. We’re doing it to ourselves and making it feel even worse.

You’ll read about several more obstacles for buying the first homes after the military. Now imagine how much worse those obstacles become if you feel like you have only one chance to get it right.

Let’s make that forever home myth even worse: did you want a job with that?

The Job Search

Fresh paint helped. A little.

I’ll be frank: one of the reasons my spouse and I pursued financial independence so hard is because neither of us wanted a bridge career after the military.

The hardest part of the job search is flexibility, and that sets up homebuyers for failure. Ideally you’d go where the job is: anywhere in America (or overseas!). Employers would contact you for interviews before you started terminal leave.

Yet too many military families want to settle in a particular part of the country. It’s the climate, or it’s near their extended families to help with elders, or it’s just close to your favorite lifestyle near an old duty station.

Let’s get this in the right order:

When you’re financially independent then you can live where you want.

If you’re self-employed then you might have a location-independent workflow.

Until those two things happen then you should live where the money is.

IVMF says that you might only be there for a year or two anyway, so consider it a series of smaller job switches as you move toward your preferred location.

Buying a home adds even more pressure in the job search. You’re already grappling with life’s big questions: What do you know how to do? What do you want to do?! Who do you want to do it for?!? Meanwhile a spouse or significant other is tapping their foot, waiting for you to make up your mind and get a job.

I’ll cut to the chase: start preparing for your next career two years before you leave the military. Assume it’s happening at the end of your service obligation (no matter how hard you study or what your command thinks about that promotion). Assume that your community is downsizing or that you don’t want the next assignment. If you encounter a physical or medical problem then begin working on your next career as soon as you start the evaluation board process.

[The end of this post has a 200-word appendix on the world’s best job-search strategy.]

Optimize your transition by going where the jobs are— or save for financial independence.

Making the Move

One ornament per move.

Congratulations, you’ve found a job and you’re packing up your household goods! You’re all too familiar with that drill.

You could treat this situation like a military transfer: as soon as you know where the job is, you’re going to frantically research neighborhoods and commutes. Once again you’re going to blow into town over the weekend, figure out the schools and the medical care, find a place, and unpack those boxes again.

Let’s hit the “Pause” button on this scenario for a second and ask “Why?”

Why push so hard? Why try to get everything finished before the first day at the new job?

Sure, during active duty everyone had to get settled in the new neighborhood and reboot their lives. The choices were constrained by the base’s location and the commute. The orders were only going to last for a couple of years. You might need to get everything done before the big field exercise or the multi-month deployment.

But this time you’re starting a different life, and you can think differently!

Instead of racing into the new location when you finish your military service, maybe it makes sense to let the kids finish the semester. The new job takes the pressure off the transition fund, and you still have a lot of research to do. Perhaps during terminal leave (or the first few months of your new life) you could send the working spouse ahead to find a small apartment, rent an AirBnB bedroom, or even couch-surf with a friend. You could schedule the household goods packout a little later and do more of your relocation research from your current home. You could send the working spouse ahead a little earlier to search for the family housing before showing up for the job’s orientation week.

There’s another new reason to take your time: what’s your income?

“Applying” for the New Home

This move is different because you’re drawing down your transition fund. You might have a few paychecks left on terminal leave but you won’t live on base, and you won’t get a housing allowance. All you have is a confirmation from your new employer that they’ll pay you (in a few weeks).

“We’ll take better care of this roof!”

Military retirees: maybe you have a retiree pay verification letter from DFAS (you printed it out from your online pay account). It promises that you’ll get a pension of about a third of the total compensation you used to earn, and the first deposit should be at the end of the first month of retirement. That first pension deposit could be delayed another month if DFAS has any processing issues with your pay record.

When you find a place to live and fill out the “income” portion of a lease or a mortgage application, you’re in for an unpleasant surprise. As far as the landlord (or the lender) can tell, you’re unemployed. Sure, you have a confirmation letter (and maybe some retirement income), and hopefully your new employer has a good reputation in your new community. Landlords and lenders want to check everything, only this time they can’t easily verify your (new, potential) income. The credit check is only good for the career that you used to have, and so are your tax returns.

The good news is that a landlord is only signing a lease for a year or two. They can work with your employer confirmation and you’ll reassure them with a month’s security deposit.

Getting a mortgage is going to be a little more complicated: a 20% down payment, a 15-year loan (or even longer), and closing costs! This is a long-term commitment to a new residence.

Here’s an ugly truth: you might not get that mortgage anyway. We’ve read dozens of panicked posts on forums and Facebook groups from veterans who’ve been turned down for a loan. They found a place, their offer was accepted, the inspections went well, and everything was moving right along… until the lender balked at their employment letter. Suddenly the seller wants to cancel your contract (because you couldn’t get financing) and move on to the next buyer.

The VA Loan Financing Fee

“No worries, I’ll get a VA loan! The qualification requirements aren’t so strict! I can put less money down, and they understand veterans!”

We finally replaced the fence. And the front yard.

You’ll learn how the VA loan really works.

First, the VA loan doesn’t come from the VA. They don’t even have a pool of loan money. They just have a bunch of Regional Loan Centers across the country to process your application. The nearest RLC might be hundreds of miles away from your new location.

Second, “your” lender might not understand veterans any better than anyone else. Unless they also have military experience, all they know about a VA loan (and the borrower) is that the VA will guarantee at least 25% of the loan balance if you default. The lender is only willing to work with your employer verification letter because the VA has a fund to cover some of the loan if you go into foreclosure.

Realtors and lenders have slim profit margins, so they want to make their money on volume. The less time (and effort) they spend with you, the sooner they can close someone else’s loan. The good news is that the VA guaranty means the lender can loosen their lending criteria (a little) and they might be able to avoid the dreaded manual underwriting of your application. That moves the loan a little faster.

Third, your chosen home might not pass the appraisal. The VA has strict criteria for “safe and habitable” homes. You might be willing to move into a quaint little fixer-upper because you know how to run a rehab. The VA is not so sympathetic and the appraiser might not be able to work around the stumbling block.

The seller of the handyman special (who’s already upset by selling at a huge discount) and their realtor (who knows appraisers) usually have to fix the safety/habitability issues before you can get a loan approval. You can use a VA loan to simultaneously purchase and improve a home (especially if you’re a disabled vet who needs to modify the home), but the loan approval process is significantly more complicated and takes more time.

Yes, you read that right. The vets who need veteran’s benefits the most tend to have a much harder time claiming them. The VA is not big on waivers.

My spouse and I have extensive personal experience with the VA’s criteria and with overzealous appraisers. (I’ll write more when that dispute is resolved.) When you apply for a VA loan you should be much more concerned about the appraiser than about the RLC or the lender.

Veterans who’d receive disability compensation if they were not already receiving a pension or active duty pay, or

Surviving spouses of veterans who died in service or from a service-connected disability.

Yet you don’t have a VA disability rating until after you finish active duty.

When you leave the military, you should start your VA disability screening along with the separation physical. The VA’s process is much faster than it used to be, but your rating is only official after your last day of active duty. In many cases it could be weeks or even months after active duty before you receive a disability notification letter.

If you’re trying to buy a home as you leave active duty, you’ll have to pay the funding fee because you don’t meet the waiver criteria. After you obtain your VA disability rating then you can apply for a refund of the fee. First, though, you’ve given away thousands of dollars from your transition fund in the hope of getting it back later.

Add it all up

Here’s what’s at stake when you leave active duty:

Chasing the myth of the forever home,

Building a transition fund,

Finding a job,

Moving to the new location,

Having enough income for a lease or a loan,

Tying up thousands of dollars in a VA loan funding fee.

No wonder military families are so stressed out on Linkedin and Facebook.

When Should You Buy a Home?

Gigantic depreciating opportunity cost.

Here’s an interesting thought: maybe you should rent for as long as you can.

Even worse, the emotions of behavioral financial psychology will derail that cold-hearted logic every time. We humans want to own a place where we can feel the illusion of control: no whimsical landlords, no rent increases, and painting the walls any color we want. We still might move every 2-10 years, darn it, but we want to be in charge of that decision.

Here’s the compromise: rent for as long as you can, and buy the home when you have the time to do it right. The downside is that you’ll make an extra move which you might have made anyway.

Renting and then making an extra move is still better than buying a home and moving two years later.

Advantages of Renting Before Buying

When you adopt a renter’s mindset, you remove some of the transition pressure.

You can take the time to make the best choice of the job search, and you understand that it might be 2-3 different jobs before you really settle in to a bridge career.

You can move your family to the new location when it makes sense instead of scrambling to do it all in a week.

Your transition fund lasts longer and you avoid the hassle of applying for a mortgage. If you later decide to buy a home and apply for a mortgage, you’ll have ample documentation of income and your VA disability rating.

Better yet, renting for 12-18 months gives you the time to learn more about your new location while you’re learning how the job will work out. You can research all the neighborhoods and schools. You can watch how the area changes over the seasons and see where the traffic jams are. You can visit open houses every Sunday afternoon to talk with sellers, realtors, and mortgage brokers. You can figure out exactly where you want to live, and what type of place you’d like to live in. By the end of the first year you might also know how the job is working out, and you’ll have the VA disability rating sorted out.

4. Once you’ve figured out your target industry and a few corporations, then contact others who are already in that industry and those corporations. (Your free year of Linkedin Premium makes it easier to contact people.) Ask them for a brief informational interview with a phone call or a cup of coffee. They already understand that you’re just learning about their career field, not asking them for a job.

Notice that you haven’t filled out a single resume or application yet? You’ll figure out the resume as you read the book and join the Linkedin group. You’ll only do a few applications, and it’ll be when one of your contacts asks you to interview with them.

WHAT I DO: I help you reach financial independence. For free. I retired in 2002 after 20 years in the Navy's submarine force. I wrote "The Military Guide to Financial Independence and Retirement" to share the stories of over 50 other financially independent servicemembers, veterans, and families. All of my writing revenue is donated to military-friendly charities.

We’ve been retired five years. Two and a half years into retirement we bought our “forever” home. Figured we’d be there twenty years, at least. And then my health rapidly went downhill. We’re still fine financially, but a few out-of-state trips have shown that my health is better in other locations. So it looks like we’ll be moving again. Plus column: We lived on an amazing piece of property in a location we’d dreamed about for years. We learned a lot about home renovations, as we renovated a significant portion of the home and the property. We tried a follow-on opportunity and learned it wasn’t what we’d hoped it would be. We think we’ll make a healthy profit when we sell, given the renovations and the increasing property values. Minus column: The realtor’s fees are gonna take a significant chunk out of our proceeds. And we’ve had a lot of assets tied up in the property when they could have been invested in the stock market during a historic bull market. Don’t know where we’re going next: might wind up in that RV you mentioned…

We rented all the time my husband was in the military. Nine full moves in sixteen years, we lived some amazing places. Since retirement, 1996, we have moved four more times, by our own choice. We have purchased houses each of those times. Since the first house was sold in 2006, the profit meant each subsequent house was purchased for cash. We will probably move at least two more times. Our houses have never been considered in our net worth. They were a place we lived. If we took a profit, it was placed in our portfolio. If we took a loss, we considered it the same as “losing rent” over those years. Delaware is our current home state. Very low taxes, nice sized Papa house, drivable distance to coast and grands. I, personally, sleep much better knowing that our house is ours. Even though we have been fully FI for about fifteen years, there is a “bag lady fear” living inside of me. A product of my generation, the fear is real. A house is stability, but moving is a norm as well. So far, so good.

After 6 PCS moves over the past decade (who put the word “permanent” in that acronym?), preparing for number 7 this summer, which will be followed by number 8 after just a year, and adding a couple children to the mix, this has become an almost daily conversation in my family. It’s still somewhat exciting to move, but also getting harder each time.

As much as we hope to know exactly where we want to settle and find the perfect home immediately upon retirement, I fear that you’re probably right. With every move, we learn something new about the world and ourselves. As we’ve gone from no kids, to a baby, to a toddler and a baby, our needs and wants have changed rapidly. The place of my dreams just a couple years ago was small apartment in the center of Boston. Now that would be a nightmare, and the polar opposite, a big house in small-town Alabama or Georgia, sounds much nicer. I have no idea how we’ll feel in ten years. The longer we spend on active duty, the more it feels like our relationships with old friends and family have faded away, or we’ve just grown apart. It certainly feels like we don’t have a “home” to return to.

You’re absolutely right about the self-imposed pressure of making the perfect choice. When the Army writes us orders to go wherever, it’s easy to grumble about the system and focus on making the best of it. But we recently had to choose where to attend graduate school, and we could have gone virtually anywhere, and we agonized over the decision for many months. Then, when we finally got here and found that it wasn’t perfect (see above about our needs and wants changing), we had nobody to blame but ourselves. I was really suffering mentally for many more months because I felt like I blew the opportunity and should have known better for the sake of my wife and kids. Let’s hope that retirement goes better.

Hi Doug. Thanks for the post and for providing such great insight! My wife and I have really enjoyed listening to your guest appearances on podcasts and reading your website! I recently purchased your book and am looking forward to reading it. My comments might be slightly more relevant to your previous post about why one should avoid buying a home on active duty, but since this is more recent, I thought I’d add it here.

Having moved a number of times now and experienced just about every flavor of military housing available (renting apartments, living on base overseas, renting a home, buying a home, and being a landlord for that home after moving), one point that is worth bringing up in the rent vs. buy discussion is a home’s “price-to-rent ratio” (PRR). For any reader who might be unfamiliar, this is the ratio of a home’s total value (i.e. purchase price) to its yearly rental cost (monthly rent X 12). It’s a helpful metric for comparing various housing markets when deciding between buying vs. renting. In places where it’s relatively more expensive to buy, the PRR will be higher (purchase cost is high compared to rental cost). In places where renting is more expensive, the PRR will be lower. It’s an arbitrary number of course, but very useful when comparing it across different regional markets. For members of the military who move so often, it’s especially important, yet too often overlooked.

I only learned about this concept recently when we made the decision to buy our second home (on active duty). I’m in the Navy, but unlike most of my service colleagues, live principally in the Midwest. In my ten years on active duty, five have been spent in Oklahoma, and I recently PCS’d back for another three-year tour. Unlike San Diego or Norfolk, rental costs are generally much higher than mortgages for comparable properties in Oklahoma. For example, we currently rent out our first house here (with a property manager) for $1,200/mo. The total mortgage cost (PITI) on this property is a little over $800/mo. After a $72 management fee, plus an added monthly principle payment on the mortgage, we’re still able to set aside about $200 every month for repairs/maintenance/tornado damage, etc. The home’s purchase price is about $140,000, making it’s PRR 9.7, which is extremely low even by local standards.

Given this low-PRR market, it was clear to us that for a given monthly housing payment (based on BAH), we would be able to get significantly more house by buying vs. renting. Looking at what we could get by renting instead of buying with the same monthly payment, we would have been less happy renting and would have been forced into a much smaller home and/or less desirable area. Looking at it another way, since it’s significantly more expensive to rent compared to buy a given home in this region, the monthly savings realized by buying could be invested in a more worthwhile vehicle, such as a stock index fund or ETF. Although upfront costs associated with the mortgage, as well recurring maintenance costs, HOA dues, etc. will certainly be higher for a homeowner, it’s conceivable that one could offset all of this, and then some, in only a matter of years (i.e. during a single tour), as the monthly savings start to compound.

Of course, the opposite typically applies to coastal areas, where home prices are much higher and PRRs are relatively much higher as well. And as was mentioned here and elsewhere, there are many other considerations besides money that influence the rent vs. buy decision. In any case, I would submit that a property’s PRR is a critical, albeit often overlooked, part of the calculus.

Thank you again Doug. We’re looking forward to reading and hearing more!

The real insight into the cost of owning your home comes when it’s time to sell. The 6% commission to the realtor (paid by the seller) and all of the other seller’s closing costs can add up very quickly. This is where many servicemembers get “trapped” in home ownership (and perhaps landlording) with an unexpected move.

When I was in the Sand Box, prior to the real estate implosion of ’07-08, I would hear stories of lots of AC, usually senior enlisted, who said they owned X and Y amount of real estate properties in military centric locations as investment and income generating units and were quite bold in telling me who much money they made and how they would never have to work a day again in their lives, so on and so forth. At time time I had lots of free flow cash sloshing around in various financial and market accounts, and actually looked at some properties in the Va. Beach area where I was living at the time. 70K Sailors and Marines in Hampton Roads, it would be a license to print money, right?

Well, well. At the end of the day I had to ask if I had the temperament and or patience to be a land lord? No. Well why not hire a property management company to do all that stuff for you? Then I have to manage them, no. Yes, but all that property throwing off XXX free cash flow? Yes, but the iron rule of money is that it will find a home where it is best treated over time, is that always real estate? Not always. As 07-08 proved what goes up can do down. Now yes, for various reasons many AC, RC, military retired do and have used real estate as a means or vehicle for RI or spend their years driving about in a Winnebago not a care in the world. But you own any house or property for one reason and one reason alone, you need a roof over your head, and you have to live somewhere. Rent, own you still need to square that circle. I have seen far to many AC, RC, retired use their properties as more or less fixed ATMs, or had no idea what they were doing, that has usually ended in tears.

I’m an active duty military member who owns 20 single family homes, and I don’t live in any of them! They are all investment properties. I will more than likely never buy a house that I live in again, it will be renting for me from now on, especially once I retire in two years.

Doug, you are exactly right. Buying is driven into everybody’s head as the smart move and a great idea, but as you and me have seen first hand, it really is not a very good investment. The townhouse that I owned in Washington D.C. for 13 years, even though it saw large appreciation over a short period, over the long term saw a modest 3% per year in the end. I regret buying it. I could’ve done something better with my money.

It was also a poor rental and cash flowed badly as I moved around the world.

Most military members will be better off renting than buying. Most will find themselves in trouble buying and then figuring out it makes a poor rental when they end up having to move away. Trying to sell it is also a gamble with all the costs involved. You are likely to lose money in the end.

One of the only times buying a house makes sense is when it will make you money as an investment. Grant Cardone is a billionaire real estate investor who also echoes this. He’s a renter, unless he’s investing.

The other time buying a house makes sense is when you are CERTAIN you want to stay in this location long term and understand that it’s not a very sound financial investment but want to do it anyway. There are things more important than money. Maybe you want your kids to go to the same schools for their entire childhood.

I think Doug’s point is, you can’t be certain you’re going to stay somewhere during that transition phase. You have to go where the job and the money is. Also, you may not realize what you want yet.

Right now, more than anything, I want to live in Hawaii when I retire. There is no way in the world I’m going to buy a house there. I may change my mind. I’ll rent.